Dossier Syntel – Lessons From Two Gigantic Trade Secret Misappropriation Verdicts (OBWB Lawers)

Lessons From Two Gigantic Trade Secret Misappropriation Verdicts

November 29, 2020

by Louis K. Bonham

The IP legal community has recently been abuzz with the gargantuan jury verdicts in two trade secret misappropriation cases. In Epic Sys. v. Tata Consultancy Servs. (W.D. Wisc.), the jury awarded $940 million. In Syntel Sterling Best Shores Mauritius Ltd. v. Trizetto Group (S.D.N.Y.)the jury awarded $855 million. While the Epic Systems award was subsequently reduced by post-trial and appellate rulings to a minimum of $140 million ($280 million maximum), and the Syntel case is still in the post-trial motions stage, both cases serve as important object lessons for companies dealing with information that may be protectable trade secrets.

Trade secrets are protected in the United States under both federal law (Defend Trade Secrets Act of 2016 (“DTSA”)) and individual state laws. In general, proprietary information can be a protected trade secret only if its owner has taken reasonable steps to keep it secret (e.g., restricted access, use of nondisclosure agreements, etc.) and if that information is valuable because it is secret. Where someone wrongfully and knowingly obtains another’s trade secret, and uses it to obtain a benefit, a claim for trade secret misappropriation may exist. While the precise contours of available relief vary from state to state, in general a plaintiff can force the trade secret thief to disgorge the benefits obtained from the misappropriation, and a plaintiff may also obtain an award of punitive damages.

In Epic Systems, the plaintiff (Epic) is a developer of software for electronic health records management, and the defendant (Tata) was a consultant hired by one of Epic’s customers to implement and customize Epic’s software. Using fraudulently-obtained login credentials, Tata employees accessed and downloaded thousands of confidential Epic documents, and Tata then used that information to develop and refine a competing software product. After Epic and its customer discovered what Tata had done, Tata employees initially lied about their activities, and either destroyed or otherwise failed to preserve the evidence of them.

Epic sued for trade secret misappropriation under Wisconsin law. Because Tata failed to preserve key evidence after it reasonably should have known that Epic would sue, the court gave a jury a spoliation inference instruction – that the jury was allowed to infer that the evidence Tata failed to preserve would all have been favorable to Epic. When a jury is given a spoliation instruction, it usually is all over for the spoliating party. And so it was in this case: the jury found for Epic on all counts.

Epic’s damages model was an “avoided costs” model – that because it would have cost the defendant $X to develop the purloined information from scratch, that amount of “avoided costs” is the measure of the defendant’s benefit. The jury accepted Epic’s expert evidence that it would have cost Tata $140 million to develop certain misappropriated information (comparative analysis data) and $100 million to develop other stolen data. The jury also awarded $700 million in punitive damages.   After post-trial and appellate rulings, the actual damages award was cut to $140 million and a punitive award of no more than $140 million, meaning that Tata will ultimately be facing a judgment of minimum of more than $140 million, and potentially over $240 million. While that is considerably less than the original $940 million, it is still a huge amount.

In the Syntel case, TriZetto is a developer of health plan administration software, and had a contract with Syntel to provide programming and consulting services. This contract contained typical confidentiality, nondisclosure, and nonsolicitation provisions. It also allowed Syntel to terminate the contract if TriZetto was acquired by a Syntel competitor, in which case there would be a two year “wind down” period during which Syntel would continue to provide the contracted services.

A few years later, TriZetto was acquired by a Syntel competitor (Cognizant), and Syntel exercised its termination option. What happened next was disputed. TriZetto claimed that after invoking its termination rights, Syntel pulled key employees from TriZetto work, and failed to perform as required during the two year “wind down.” TriZetto also asserted that on their way out the door, Syntel employees downloaded thousands of confidential TriZetto documents, and Syntel thereafter used that information to try and steal TriZetto clients. On the other hand, Syntel claimed that TriZetto improperly hired some of its employees after Syntel invoked its termination rights, and in so doing wrongfully obtained Syntel’s trade secrets. TriZetto’s responded to these charges by claiming that its parent company (Cognizant) was the party who hired the former Syntel employees, and that Cognizant was not subject to the nonsolicitation provisions of the TriZetto-Syntel contract.

The parties thus sued each other, each asserting trade secret misappropriation under both the DTSA and state law in addition to a litany of other claims. At trial, the jury found for TriZetto and rejected Syntel’s claims and defenses. As in Epic Systems, TriZetto’s primary damages model was an “avoided cost” model (allowable for DTSA claims but not New York state claims). The jury awarded TriZetto $285 million actual damages (avoided costs) and $570 million punitive damages under the DTSA, for a total award of $855 million. (Post-trial motions for entry of judgment and to set aside or modify the award are currently pending.)

What lessons can be drawn from these two cases?

First, the law can provide severe remedies for trade secret misappropriation. However, this protection and the available remedies will exist only if the owner of proprietary information has taken the required measures to actually keep it secret – both in terms of setting up such measures and making sure they are maintained. Because both Epic and TriZetto did so, they were able to avail themselves of the law’s protections. Companies with trade secrets should do likewise.

Second, stealing another’s trade secrets and using that information in your business can result in catastrophic liability. Juries have little sympathy for thieves.

Third, failing to timely implement and maintain a “litigation hold” on potentially relevant evidence can be lethal to your case (whether as a plaintiff or a defendant). Having established procedures for a “litigation hold” that can be implemented immediately upon notice of a potential claim is strongly recommended.

Finally, “avoided costs” damages models in trade secret cases are becoming increasingly accepted, and can result in enormous awards – especially if a punitive damages award doubles or triples the amount of avoided costs.